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Project Bundling, Liquidity Spillovers, and Capital Market Discipline

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  • Müller, Holger M.

    (Department of Economics, University of Mannheim)

  • Inderst, Roman

    (Sonderforschungsbereich 504)

Abstract

This paper presents a theory of integration based on the inability of parties to write comprehensive financial contracts. In our model, integration entails both benefits and costs. On the one hand, integration involves liquidity spillovers between projects ensuring that integrated firms can raise external finance on easier terms than stand-alone firms. On the other hand, integration reduces the firms' need to return to the capital market for follow-up financing. But in a world where contracting is incomplete, the threat not to fund follow-up projects may be the only means that investors have to induce borrowers to repay their debt. By lessening this threat, integration may raise the cost of external finance.

Suggested Citation

  • Müller, Holger M. & Inderst, Roman, 1999. "Project Bundling, Liquidity Spillovers, and Capital Market Discipline," Sonderforschungsbereich 504 Publications 99-89, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    • Handle: RePEc:xrs:sfbmaa:99-89
    Note: Financial Support from Deutsche Forschungsgemeinschaft, Sonderforschungsbereich 504, is gratefully acknowledged.
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    Cited by:

    1. Axel Gautier & Florian Heider, 2001. "What Do Internal Capital Markets Do? Redistribution vs. Incentives," FMG Discussion Papers dp386, Financial Markets Group.
    2. Holger M. Mueller, 2000. "Project Bundling, Liquidity Spillovers, and Capital Market Discipline," Econometric Society World Congress 2000 Contributed Papers 0681, Econometric Society.

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